Value Added Tax is a sales tax on taxable goods and services that is calculated at two different rates. The standard rate is 17.5 per cent (20 per cent, as of Jan. 4, 2011) and the reduced rate (5 per cent). If you are a VAT-registered business and you collect sales tax for Her Majesty's Revenue and Customs, then you must calculate the price of goods with VAT (VAT-inclusive) and without VAT (VAT exclusive, or ex-VAT).
Write down the amount the item costs. For example, the item might cost £235.
Write down the VAT tax rate on the item as a decimal. For example, 20 per cent is 0.20, 17.5 per cent is 0.174, and 5 per cent is 0.05.
Add 1 to the figure from Step 2. For example, if you wrote down 0.175 (17.5 per cent), then:
0.175 + 1 = 1.175.
Divide Step 1 by Step 3. In the above example, if the £235 item was sold at the standard rate of 17.5 per cent, then £235 / 1.175 = £200.
Make sure you are calculating the correct rate (standard or reduced). Click on the HMRC's "Rates of VAT on Different Goods and Services" link in Resources and find the item purchases to get the correct rate. For example, while a car is taxed at the standard rate, a child's car safety seat is taxed at the reduced rate.